Evolve or die, they say.
It’s an extreme statement, a bit simplistic in some respects, but the principle holds true in financial services, particularly banking.
Because, after all, the most basic banking services, the hardcore ones that have been around for decades, even centuries, are being targeted by digitally savvy upstarts who promise all sorts of perks, including speed, convenience, and depending on Wherever you look, lower rates and higher rates.
In just a few examples: Goldman is entering consumer banking, LendingClub bought a (digital) bank, and there are a host of FinTechs offering snippets of the banking experience, while Big Tech of course offers products for small businesses and other loans. .
In other words, the pits are shrinking, but that goes both ways. By the same technological advances and access to data that drive these smaller and younger companies, traditional financial institutions (FIs) can empower them to compete in new markets, with new products and services that capture the participation of the mind and the consumer wallet.
We are talking, of course, about open banking, which makes it possible, with data authorized by the consumer, to develop those offers on the fly, putting new options in front of the end user in context, at the right time, for the right price.
All of this points to what we could compare to an existential change for the banks themselves. In a report last year, “What is a bank?” We observe that 36.8% of consumers characterize banks as institutions that store money safely, while 34.9% characterize them as institutions to save and earn interest on deposits and 27.1% characterize them as institutions that grant loans and make investments.
Read here: The many responses to “What is a bank?”
Pretty strong definitions.
But by adhering to those silos, banks miss out on other sources of income that are not necessarily connected to those well-defined activities. By leveraging new levels of connectivity, banks can create new lines of business that are not connected to traditional ones… but can cross-pollinate with them.
Case in point: buy now, pay later, commonly known as BNPL.
The world’s Affirms and Afterpays, among others, have built a front-line momentum by offering a loan option that is not tied to traditional lines of credit (as they would be at a bank) or cards. The conventional wisdom is that these installment loans would take at least a portion of the banks’ card lines. Part of the problem has been the infrastructure needed to start up this installment financing.
But now comes the news that Mastercard is moving, decisively, into the BNPL space, announcing on Tuesday (September 28) that it is providing the necessary connectivity to banks (and others) to bring their own BNPL plans to users. , through 78 million merchants. As detailed in this space, initial deployments will take place in the United States, Australia, and the United Kingdom and will see BNPL functionality incorporated directly into the payments network through multiple avenues. Studies have shown that sales can increase by as much as 45% and, at the same time, cause a 35% decrease in shopping cart abandonment.
Read: Mastercard fees bring new lender network and instant turnkey BNPL to 78 million merchants
Dealing with the frontline threat
For banks, BNPL may have represented a front-line threat from BNPL’s “pure games.” But the fact that stocks like Affirm are down, as of this writing, several percentage points (down 5 percent at Tuesday’s open for Affirm, similar slides for others) shows that observers are aware that the field of Gameplay has been leveled a bit for the benches (and the pure game pit is not as “moat” as some might have thought).
For banks, there is another advantage. PYMNTS research has shown that BNPL is especially attractive to “second chance” consumers who may have less than pristine credit. But the data shows that 65% of those second-chance consumers make more than $ 50,000 per year, and 30% make more than $ 100,000. The average second-chance consumer is 44 years old and has a FICO score of 662, or just 38 points lower than the average “good” credit score. That is promising for banks starting with BNPL offerings, separate from their traditional lines of credit, with a view to “incorporating” those consumers into other products and services, with good repayment activity with BNPL loans.
Cross-pollination is good practice for top-of-the-line torque and recurring income, and given the relatively younger age of BNPL consumers, the lifetime value is also extended. With connectivity established through the Mastercard network effect, banks can evolve.